Household Buying Power Up the Most in 7 Years

Household buying power exploded by $2.3 trillion in 2012, the biggest increase since 2005, led by a surge in homeowners' equity, according to a report by Deutsche Bank.

The firm calculates the metric by adding household cash flow (income minus taxes), home equity and consumer credit. It uses the recently released data in the Federal Reserve's fourth quarter Flow of Funds report.

"At minimum it should underpin the gains in consumer spending we are projecting in the quarters ahead," said Joe LaVorgna, Deutsche's chief U.S. economist. "If the labor market builds upon its recent momentum, this will further lift demand for housing, thereby pushing home prices and household buying power even higher."

Homeowner's equity made up the bulk of the fatter wallet consumers may be feeling today, jumping a whopping $1.6 trillion. Household cash flow was up a net $603 billion, according to Deutsche, and consumer credit added another $42 billion to buying power.

The report said it calculates "buying power" this way because "households can consume through current cash flow or they can borrow" using credit cards or home equity lines of credit.

Cracks in Housing Recovery?

David Rosenberg, Gluskin Sheff's chief economist, says four cracks remain in housing, including tight credit conditions, high unemployment, tight inventory and a lack of first-time buyers.

The S&P 500 is up almost 9 percent this year as this increase in wealth drives housing-related and banking stocks higher. The Federal Reserve reiterated Wednesday its plan to keep interest rates low by buying Treasury securities.

The Fed's actions "will further support the uptrend in housing prices and the pass-through into buying power," LaVorgna said.

To be sure, some investors would like to see the wages part of the equation increase more before they believe the domestic economy is truly on sound footing. Refinancing and credit cards driven by the Fed's accommodative policy can only take us so far, they argue.

"Most of the country is living on credit, and when the credit card bills get too big, they tend to adjust their buying habits," said David Greenberg of Greenberg Capital. "I expect the same to happen this time."

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